RetireMentors

IRAs

Not all retirement dollars are eligible for Roth conversions

Dan Moisand,
a Principal at Moisand Fitzgerald
Tamayo, LLC in Melbourne and Orlando, Fla., is one of the financial
planning profession’s most respected practitioners advising retirees and near
retirees. Dan’s thoughts can be found in bylined articles in most major
publications for financial planners and a slew of financial planning related
publications have featured him as one of America’s top advisors and was recently
named one of
"15
transformational advisers" by InvestmentNews. A past national
President of the Financial Planning Association (FPA), his service to the
profession includes three years on the CFP Board of Practice Standards crafting
the standards to which all US CFP’s must adhere and serving as Chairman of the
CFP Board’s Discipline and Ethics commission, the body that judges complaints
against CFP licensees. A frequent presenter at such events in the U.S., Dan has
spoken to planner groups on five continents and in recent years has led
delegations of U.S. planners to Russia and China on behalf of the FPA.

The tax-free cash one can get from a Roth IRA is appealing but getting money into the Roth IRA in the first place can present challenges.

Q.Greetings, Most of my retirement savings is in a deferred compensation account. Once I retire, if we have money above our retirement needs, may I contribute my unused deferred comp money into my Roth IRA? Thanks and positive thoughts — B.P.

A. There are only two ways to put money in your personal Roth IRA, contribute or convert.

If you have earned income (work), you may be able to contribute a small amount to a Roth. Deferred compensation payments are not considered earned income for IRA contribution purposes. Contributions are limited per year to the lesser of 100% of earned income or $5,500 ($6,500 if over age 50). To be eligible to contribute the full amount for 2014, single filers must have an adjusted gross income of less than $114,000 and joint filers less than $181,000.

There is no limit to how much money you can convert to a Roth IRA nor is there an AGI limitation. However, you can only convert certain types of retirement plan monies. Many types of deferred compensation plans do not allow rollover to any type of IRA. Check your plan documents for specifics.

Q.Dear Mr Moisand, My wife and I are essentially the same age, 2-day differential; I am the old one. We will soon reach 62 and are considering starting Social Security for just my wife based on her own benefits. I am targeting starting at age 66, so if my wife starts her benefits based on her income at 62, will she qualify for full spousal benefits since I waited until 66 to start mine, or will they be reduced because she started hers at 62? Thank you for your help — B.R.

A. If she claims her benefits before her Full Retirement Age (FRA), she will get less than half of your primary insurance amount (your retirement benefit at your FRA), even if she doesn't claim a spousal benefit until her FRA.

Q.I am 62 and will be retiring at the end of December 2014. I will roll over my 401(k) employer account into an IRA. My plan was to keep out about $120,000 to pay off the house. How will this affect my Social Security benefits that will start in January of 2015? My only income will be my Social Security in 2015 plus my husband is also retired and we will be filing our income taxes jointly. Thank you — Pam. M.

A. A distribution from a 401(k) plan or IRA is not considered earned income so it will not affect the amount of your Social Security benefit. However, $120,000 in taxable income from such a distribution does affect how much of your Social Security will also be included on your joint return as taxable income. For married couples, if your "combined income" exceeds $44,000, 85% of your Social Security benefits are taxable.

Q.I was born in November, 1948 and my wife was born in December, 1952. My SS at FRA is $2,410, and my wife's is $2,384. I started receiving SS at age 63. We do not need the income, but our concern is that in the future the payments will be adjusted for need, and we might not get our “normal” amount since we have other pensions and have saved our whole lives. My wife is still working, but could retire at any time. What would you recommend? Thanks for your time and help. — C.B.

A. Grabbing what you can while you can makes the most sense to couples in which neither spouse expect to live into their 80s. If either one of you expects longevity, the basic strategy points to delaying the larger of the two benefits as long as possible.

Since you started early, you are stuck with a reduction. With your wife still working, her eventual benefit should continue to grow. Since her benefit will be larger than your reduced benefit, she should try to delay filing for her benefit as long as possible. At her Full Retirement Age of 66, if she hasn't filed for anything by that point, she should consider filing a restricted application for spousal benefits only. This will get her $1,205/month and still allow her benefit to earn delayed credits.

No one knows how the system will change in the coming years but if benefits were reduced across the board by 25%-30% as some say would be necessary if absolutely nothing changes, the effective rate of return for delaying still compares favorably to other conservative investments. You just have to have one of you live long enough to get the benefit of delaying.

Dan Moisand's comments are for informational purposes only and are not a substitute for personalized advice. Consult your advisor about what is best for you. Some questions are edited for brevity.

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